What’s your assessment of the current market climate as things have been quite volatile globally and locally? Do you suggest at this juncture sitting on the sidelines and having a wait-and-watch approach or do you feel aggressive positioning could be made to enter the market or position your bets at this juncture?
I am a firm believer that the equity markets will continue to give returns, albeit not as high as what we saw from March onwards last year. The general trajectory for emerging market equities is positive and India is sweetly positioned, as far as emerging markets are concerned. Markets went up in a hurry, so its characteristic for markets to correct in such times and come back a tad bit. But if you see the kind of correction that we have seen in the context of the overall Nifty or Sensex, it is probably about 4% or 5% only from the highs or may be 6%.
I would not be too perturbed by these corrections. And in a way, some of it is healthy as the gap between the real economy as well as the markets narrows, corporate earnings start supporting this narrowing and the real economy picks up. I believe that markets will continue to give positive returns, so I would still stay invested. Although I would say that it will not continue to be just a broadbased rally, so from an investment perspective I would look at specific value picks and judiciously analyze stocks before investing.
Looking at financials, specifically in the context of global bond yields rising, the Supreme Court’s recent decision on loan moratorium, could Q4 be an eye opener of sorts or do you think that the story is intact and one should not look at short-term concerns?
I think you are right, Q4 results are going to be very important and there is going to be a lot of scrutiny as far as this quarter’s results go. Couple of reasons for that. One, the recent supreme court ruling around recognition of NPAs and their diktat also on interest on interest during the moratorium will clearly have an impact. Some of it has already been accounted for, in fact large part of it. But it still remains to be seen and results would wary from bank to bank. The second thing is that with the second wave of the pandemic in India there are clearly concerns emerging, as far as what is the shock absorption ability of banks and financial institutions.
The good thing is most of the large and midsized banks in India raised capital last year and raised capital well ahead of time. This was in a way to face this sort of a situation wherein there could be potential shocks in the economy and it remains to be seen how the second wave goes and its impact on the economy. But most of the banks have their financials in a healthy shape and have the ability to not just absorb the shocks, but also to capitalise on growth opportunities as they emerge when the pandemic is largely under control and the economy has picked up; which is expected to be the case this year. I feel at this stage I would still be interested in banks and financial institutions, but Q4 results are going to be significantly under scrutiny and it remains to be seen what is the shock absorption capability of each of these institutions.
What about FPI flows? Do you think that the rising bond yield could be a threat to FPI flows for emerging markets, especially for India?
Yes, we have seen record FPI flows last year into India and this year in the first three months we have seen something to the tune of about 6-6.5 billion come into India from FIIs. I do expect this to continue. There will be periods of volatility in the market because of withdrawal of some of these flows into India as a result of various factors like inflationary pressures or interest yields in the west rising. Now, the recent spurt in interest yields has been the cause of concern quite clearly and has led to a lot of volatility, but having said that I just feel that the global economy is in such a shape that it requires support for a sustained period of time from central banks.
So, monetary policies from central banks are going to be supportive of repairing the economies globally and of growth. Hence, there is going to be liquidity in abundance and it will have to find its way to emerging markets like India which offer higher interest and higher return opportunities versus the low-rate environment that prevails in the west.
What is your view on valuations because they still seem to be a bit high for Indian equities? Any sector allocation or a rejig of portfolio that you would like to suggest?
Indian markets have traditionally been valued or traded at a slight premium to emerging markets. Markets have rallied world over, but having said that, currently the Indian markets are on the expensive side with the markets trading at a 22-23 times PE. Which is why I said that now the rally has become slightly more broadbased and hence just taking a view that markets are going to return 20% overall this year is perhaps not the way. I would still say that there are value picks and there are sectors which one should focus on which are seeing still early signs of recovery or perhaps are positioned well to take advantage of the recovery in the economy, irrespective of how complex this second wave of the pandemic is.
I would still be strongly focussed on the new economy technology sectors. I think that is the future. Some of the business models in India have clearly elucidated that they would survive and perhaps change the way business happens and the way consumerism happens in India. I would be very focussed on that sector.
I think financials still offer a decent opportunity. Again, not across the sector, but some of the large private banks are well positioned to exploit the market as the economy continues to recover and some of the consumer staples as well. I would perhaps stay away, for the time being, from sectors like real estate, hospitality and aviation which clearly would have some sector leaders and I would still bank on them. But having said that, these are sectors which may take some more time to recover and hence I would be cautious with them.
